All Forum Posts by: Stuart Udis

@Andrew Postell I don't necessarily agree. We've facilitated this for clients successfully on a number of occasions. You are correct, it's certainly easier to do so with a rehab vs. ground up and that's where my example above focused. Furthermore, as the total dollar size of the project increases it becomes increasingly difficult to bake the necessary soft costs and inflated budgetary numbers into the loan (whether it is rehab or new construction). The key criterion you want to look at in a lender is the ability to finance soft costs and interest reserve (a true LTC on all project expenditures) and a lender who allows items such as developer fees and higher contingencies to be incorporated into the budget. If the lender allows this and lends up to 75%LTV you need to outlay an additional 25% of equity. For illustration purposes, if the project cost is $100,000 and $25,000 would customarily be required as the downpayment, the equity amount becomes $31,000 in order to finance the additional $25,000 of project costs permitted by the lender. Yes, the day 1 equity amount is increased slightly, but upon final draw, close to if not all of the down payment funds are recouped. The workaround we've seen in new construction or higher transactional dollar projects is a stabilized release that's pre-negotiated when the commitment letter is obtained. It serves as the same function as a BRRRR refinance without the transactional costs and brain damage of having to go through a refinance process. Currently the biggest push back we are seeing is not necessarily the LTV, but DCR. Lenders we work with are still lending up to 75% LTV but a second requirement is a 1.2 or 1.25 DCR. Consequently, we are seeing more loans get approved at 65%-70% LTV because the properties are not meeting the debt coverage ratio with today's interest rates at 75%LTV. This should relax as we expect to see rates begin to decrease.

I continue to hear from investors who want opinions on elaborate webs of entities yet fail to  establish appropriate risk management procedures. I would say no more than 1 out of 6-7 people I speak with execute contracts or collect insurance certificates from 3rd party service providers. I am curious why there is so much resistance to taking these steps? Is it cost? Time? Lack of understanding? Interested in hearing other's perspectives on this subject.

@Gordon Middleton Curious to hear your reasoning for wanting to separate the management from the real estate in this case? From a liability standpoint it's a pretty clear case of an alter ego entity structure which any good attorney will be able to fight through and will add a redundant layer of insurance you have to pay for. I previously served as counsel at a Hospitality REIT where management was separate but the management was a viable business that managed REIT owned as well as 3rd party hotels. It's not uncommon to see this, but not in the context of your situation.

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The investment strategy has a greater impact on the tax implications than the entity structure. Always good to loop in your accountant with your attorney as you formulate your structure as there could be some nuance ways to avoid certain tax events with structure but generally speaking if tax consequences is something you are sensitive towards (which is a good way to approach the business) the type of investing and timing of dispositions has a greater impact.

If Shariyf is planning for 3 units, I don't believe a refusal will be issued unless the lot size is less than 1,080 SF. If that were to be the case a use refusal will be issued. He will not need a full set of architectural drawings at this stage, merely a zoning plan which reads more like a site plan. Once the zoning permit is issued it would then be more appropriate to prepare and submit the architectural drawings. 

The cost plus should only apply to the hard construction costs, not the land acquisition. When it comes to any 3rd party GC relationship the biggest challenge is alignment of interests. There are a number of ways to approach the relationship but the two general categories you will see are cost plus or GMP/Fixed (some subtle differences between GMP/Fixed but for the purpose of this subject they can be grouped together). I would agree with the advice Chris gave, cost plus leaves you susceptible for pass through of all costs. At the same time, with GMP/Fixed, if the GC is losing margin on the build they can walk off the job or take short cuts to reduce their cost. That's the dilemma and why I say alignment of interests is the biggest challenge in hiring a 3rd party GC. 

If you are going to purchase a parcel where the seller will then build, you should take the time to ensure everything is in order prior to settlement on the land. Make sure all final permits are issued, and the approved plans and specifications are referenced in your construction contract. Again as Chris suggested, avoid a cost plus engagement and ask up front for copies of the subcontract proposals to ensure they tie in accurately to the overall budget. This is a helpful way of confirming the budget is well thought out. Builders will sometimes push back as they don't want you to see your profit margin but the easy way to circumvent the resistance is to explain you will need lien wavers for each subcontractor in order to release the construction funds so you are going to see what each sub is making anyway. It's a good way up front of setting expectations and if they continue to push back then consider it a red flag.

If there is a rental license that's been active in the past 3 years, the city should issue a new rental license as long as other rental license pre-requisites are in order. If not, the city does not have to honor the 2 family use and could require a new use permit where you would need to have an architect or civil engineer submit a new zoning plan and obtain a zoning permit. 

The best way to build a pipeline of good off market acquisitions is to be active & perform on contracts you execute without re-trading on terms (unless there's a valid diligence discovery). Reputation is everything and the brokerage community takes notice. Ultimately, those who are pushing the deals want to send them to buyers who will execute and make their lives easy. After all, they want certainty (or at least as close to certainty) as they can get in order to collect their fees. You provide reasonable certainty and do so consistently, you will be rewarded with deals that are brought to you off market.

Land development is very localized with the zoning/land use and pre-requisites required to break ground largely dependent on the municipality.  You should have completed a Phase 1 and possibly even a Phase 2 before you purchased the property. Assuming that was completed, you should engage a civil engineer to prepare a property boundary survey, topography plan and a geotechnical survey as your next step. A local civil engineer should be able to provide a roadmap of the approval process from there. You will ultimately need to engage an Architect, MEP engineer and a Structural engineer as well.

 @John O'Leary I've seen the adjustable LTC based on experience but in my example neither lender adjusted their LTC based on experience. The 90% LTC lender only applied the purchase price and the soft/hard construction costs & contingency to their definition of LTC whereas the 80% LTC lender also financed 80% of the settlement costs and interest reserve. I have seen everything from settlement costs included/not included to interest reserves capitalized (as was the case in my 80% LTC example. I have also seen no interest reserve whatsoever and while the cash needed on day of origination might seem much lower, once applied to the transaction, the cash requirement is actually much higher (albeit partially delayed in being required). The point I was trying to get across is lenders incorporate different project cost line items into their LTC and the lender who advertises the higher LTC, may not actually be the lender who provides the best leverage depending on what portion of the transaction is financed.